Managerial Accounting Question Details Praven Company Statement of Financial Pos
ID: 2387354 • Letter: M
Question
Managerial AccountingQuestion Details
Praven Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities $150 $130
Accounts receivable, net 190 160
Inventory 170 180
Prepaid expenses 50 40
Total current assets 560 510
Noncurrent assets:
Plant & equipment, net 1,420 1,330
Total assets $1,980 $1,840
Current Liabilities:
Accounts payable $110 $100
Accrued liabilities 90 60
Notes payable, short term 260 260
Total current liabilities 460 420
Noncurrent liabilities:
Bonds payable 400 400
Total liabilities 860 820
Stockholder’s equity:
Preferred stock, $5 par, 15% 120 120
Common stock, $10 par 240 240
Additional paid-in-capital-common stock 210 210
Retained earnings 550 450
Total stockholders’ equity 1,120 1,020
Total liabilities & stockholders’ equity $1,980 $1,840
Praven Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) $1,700
Cost of goods sold 1,190
Gross Margin 510
Selling and administrative expense 200
Net operating income 310
Interest expense 40
Net income before taxes 270
Income taxes (30%) 81
Net income $189
Dividends during Year 2 totaled $89 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $130.
Required:
Compute the following for Year 2:
1. Book value per share
2. Working capital
3. Current ratio
4. Acid-test ratio
5. Accounts receivable turnover
6. Average collection period
7. Inventory turnover
8. Average sale period
9. Times interest earned
10. Debt-to-equity ratio
Explanation / Answer
Current assets:
Yr1 Yr2
Cash and marketable securities. . . . . . . . . . . . $150 $130
Accounts receivable, net . . . . . . . . . . . . . . . . . 190 160
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 180
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 50 40
Total current assets . . . . . . . . . . . . . . . . . . . . . . 560 510
Noncurrent assets:
Plant & equipment, net . . . . . . . . . . . . . . . . . . 1,420 1,330
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,980 $1,840
Current liabilities:
Accounts payable . . . . . .$ 110 $100
Accrued liabilities . . . . . . 90 60
Notes payable, short term .. . . 260 260
Total current liabilities . . . .. . 460 420
Noncurrent liabilities:
Bonds payable . . . . .. . . 400 400
Total liabilities . . . . . . . . . 860 820
Stockholder’s equity:
Preferred stock, $5 par, 15% . . 120 120
Common stock, $10 par . . . . . 240 240
Additional paid-in capital—common stock . . . 210 210
Retained earnings . . . . . . . . . . . . . . . 550 450
Total stockholders’ equity . . . . . . . . . . . 1,120 1,020
Total liabilities & stockholders’ equity . . . $1,980 $1,840
3
Praven Company
Income Statement
For the Year Ended December 31, Year 2 (dollars in thousands)
Sales (all on account). . . . . . . . . . . . . . . . . . . . . $1,700
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,190
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . 510
Selling and administrative expense . . . . . . . . . . 200
Net operating income . . . . . . . . . . . . . . . . . . . . . 310
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 40
Net income before taxes . . . . . . . . . . . . . . . . . . . 270
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . 81
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189
Dividends during Year 2 totaled $89 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $130.
Required:
Compute the following for Year 2:
1. Book value per share (total assets – total liabilities / outstanding shares) $48.57
2. Working capital (510-420) 90
3. Current ratio (510/420) 1.2
4. Acid-test ratio (290/420) (.7)
5. Accounts receivable turnover (1700/175) 9.7
6. Average collection period (175/ (1700/365) 37.6 days
7. Inventory turnover (1190/175) 6.8
8. Average sale period (inventory turnover (6.8/ 365)) 53.7 days
9. Times interest earned (310/40) 7.8
10. Debt-to-equity ratio (total liabilities/ total stockholder’s Equity) .8
CHAPTER 16: Financial Statement Analysis
I. FINANCIAL STATEMENT ANALYSIS
? What is Financial Statement Analysis?
? There are three basic tools of analysis:
horizontal, vertical, and ratio analysis.
A. HORIZONTAL ANALYSIS (aka Trend Analysis)
• a technique for evaluating a series of financial statement data over multiple time periods
• can be expressed as either a dollar amount or a percentage
• to look at trend over time, select a base year; changes are expressed as percentages of the base year amount.
• Example:
B. VERTICAL ANALYSIS (Common Size Statements)
Vertical analysis expresses each item within a financial statement as a percent of a base amount. Generally, the base amount is:
• For the BALANCE SHEET:
• For the INCOME STATEMENT:
C. RATIO ANALYSIS:
- Ratios express the mathematical relationship
between two or more financial variables
II. RATIO ANALYSIS—A closer look.
Note: the formulas under “II. Ratio Analysis” will be provided on the exam.
A. Ratio Analysis: Profitability
1. Earnings per share: measures the amount of net income earned on each share of common stock.
2. Price-earnings ratio: measures the ratio of market price per share of common stock to earnings per share. Reflects an assessment of a company's earnings from the perspective of the stock market.
3. Dividend payout ratio: measures the percentage of earnings distributed in the form of cash dividends.
4. Dividend Yield Ratio: measures the rate of
return (in the form of dividends) earned by
an investor who buys a share of stock at
the current market price.
5. Return on total assets: measures the ability
of the firm to earn a return on its assets.
6. Gross profit rate: indicates a company's ability to maintain an adequate selling price above its costs.
Gross profit rate =
7. Return on common stockholders' equity:
measures ability of the company to
earn a return on the common stockholder’s
investment.
* Average Common Stockholder’s equity =
8. Book Value per share: measures what would be distributed to stockholder’s if assets were sold at their carrying values and if creditors were paid off.
Book Value per Share =Total Stockholder’s equity – Preferred Stock
Number of common shares outstanding
B. Ratio Analysis: The short-term creditor
(Liquidity Ratios)- provide a measure of ability of the enterprise to meet current obligations in a timely manner.
1. Working Capital: measures the company’s ability to repay current liabilities using only current assets.
Working Capital = Current Assets – Current Liabilities
2. Current ratio: expresses the relationship of current assets to current liabilities. It is a widely used measure for evaluating a company's short-term debt paying ability.
3. Acid-test ratio: also measures ability to pay short-term debt but excludes less liquid current assets.
Marketable Current
Acid-test ratio = Cash + Securities + Receivables
Current liabilities
4. Accounts receivable turnover: used to assess the liquidity of the receivables; measures the number of times, on average, receivables are collected during the period.
5. Average collection period: A popular variant of the receivables turnover ratio; it converts it into an average collection period in terms of days.
6. Inventory turnover: measures the number of
times, on average, the inventory is sold during
the period. It indicates the liquidity of the
inventory.
7. Average Sale Period: A variant of the inventory turnover ratio--computes the average days taken to sell the average inventory one time.
C. Ratio Analysis: The Long-term creditor
(Solvency Ratios)- measures of the ability of
the enterprise to survive over a long period of
time.
1. Times interest earned: measures a company's ability to meet interest payments as they become due.
2. Debt to Equity ratio: measures the relative proportion of financing provided by creditors as opposed to financing provided by stockholders.
Debt-to-equity ratio = Total Liabilities
Total Stockholder’s Equity
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